Munich Re to buy AIG unit for a bargain price of $742 million
22 December 2008
Munich Re, the world's biggest reinsurer, will acquire American International Group Inc.'s (AIG) Hartford Steam Boiler (HSB) unit for $742 million, about a third less than the US insurer paid for it eight years ago. This is a further step in the Munich-based reinsurer's effort to grow more profitable in the key American market.
The purchase price is considered well below HSB's value - estimated at between $1 billion and $2 billion - as AIG is forced to sell off units to pay back a US government bailout loan. Munich Re will fund the cash purchase of HSB Group entirely from ''existing resources,'' the Munich-based company said in a statement today. HSB Group Inc.'s CEO, Douglas Elliot, will stay on to run the unit.
Munich Re said the purchase wouldn't affect the planned share buyback program or the planned 2008 dividend of €5.50 a share. The deal is subject to regulatory approval but is expected to be closed at the end of the first quarter of 2009. The acquisition of HSB will have a positive impact on Munich Re's earnings in 2009, although immediate synergies aren't expected, Munich RE CFO Joerg Schneider said.
AIG's CEO Edward Liddy is dismantling what was once the world's biggest insurer to repay loans tied to the company's $152.5 billion government rescue. That bailout had replaced a previous $85 billion loan from the US Federal Reserve as it became apparent the insurer needed more funds to survive. (See: Fed pumps another $37.8 billion in AIG / $85-billion bailout for AIG)
AIG has also put its airplane-leasing subsidiary and global life insurance businesses up for sale. The New York-based insurer bought HSB for $1.2 billion in stock in 2000. AIG has already agreed to sell AIG Private Bank, a unit catering to wealthy clients in Asia and the Middle East, to Abu Dhabi-based Aabar Investments PJSC for 307 million Swiss francs ($279 million). It is also selling a stake in an insurance joint venture in Brazil for $820 million. (See: AIG offloads private banking arm for $254 million)
Munich Re said HSB, headquartered in Hartford, Connecticut, fits well into its profitability drive announced in 2007 to grow profitably in the world's most important insurance market by establishing and building on a leading position in high-return niche segments of the US primary insurance market.
''The acquisition of HSB is a perfect fit for our US strategy,'' said Peter Roeder, Munich Re's board member responsible for the US business. ''It is another step in developing our position in high return specialized niche segments.''
Since announcing the program as part of its "Changing Gear" profitability drive, Munich Re has already acquired a number of highly profitable US primary insurance players, among them The Midland Co. in October 2007 for $1.3 billion and health-care insurer Sterling Life Insurance Co. for $352 million in December 2007.
Munich Re rose as much as €1.14, or 1.1 per cent, to €107.5 in Frankfurt electronic trading and was up 0.2 per cent as of 09:41 a.m. The stock has declined about 20 per cent this year. AIG rose 3 per cent in European trading to $1.65.